Urban Outfitters Inc (URBN) 2009 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Urban Outfitters Incorporated second quarter fiscal 2009 earnings call. (OPERATOR INSTRUCTIONS ). The following discussions may include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Please note that actual financial results of the Company for the periods being discussed may differ materially from the financial results projected or implied in the forward-looking statements.

Additional information concerning factors that could cause actual financial results to differ materially from projected result is contained in the Company's annual report on Form 10-K and other documents filed by the Company with the Securities and Exchange Commission. The Company disclaims any intent or obligation to update forward-looking statements. No reporting or rebroadcast of this call is permitted without the Company's express written permission. I will now like to introduce your host for today's conference, Mr. Glen Senk, CEO. Sir, you may begin.

Good morning. It's my pleasure to welcome you to the URBN quarterly conference call. Joining me today is Dick Hayne, our Chairman, John Kyees, our Chief Financial Officer, Ted Marlow, our President of the Urban Outfitters Brand, Meg Hayne, our President of the Free People Brand and our senior executive staff. Earlier this morning, the Company issued a press release outlining the financial and operating results for the three- and six-month periods ended July 31, 2008. I will begin today's call by reading prepared commentary regarding our performance. Then the group and I will be pleased to answer any questions you may have. As usual, the text of today's conference call can be found on our corporate website at www.urbanoutfittersinc.com.

Put simply, we couldn't be more pleased with the exceptional results our team produced during the second quarter. Total company sales for the period increased by over 30% to $454 million, the second highest quarter in our history. Total company comparable store sales grew by an impressive 13%. Anthropologie, Free People, and Urban Outfitters achieved comp increases of 7%, 10% and 19% respectively. Direct-to-consumer sales jumped by 42% despite increase of just 8% in catalog circulation with all three brands contributing meaningfully to the result. Free People wholesale revenue increased by 14%, our 19th consecutive quarter of double-digit sales growth.

Income from operations grew by 75% to a record-breaking $83 million, or an operating margin of 18.3%. Finally, the Company's second-quarter earnings increased by 79% versus the same period last year to a record $57 million, resulting in earnings per diluted share of $0.33. I will now go into more detail on each of the metrics of our business for the quarter, starting with sales. New and non-comparable store sales contributed $47 million, accounting for 44% of the total revenue growth. The Company successfully normalized the store opening schedule, opening 12 new stores in the period. Six Anthropologie stores, three Free People, and three Urban Outfitter stores compared to opening five stores during the same quarter last year.

The Company achieved double-digit comps every month of the quarter with gaining momentum throughout the period driven by Urban Outfitters' strong back-to-school trend. 88% of the Company's stores were comp-positive for the period, and while all regions experienced healthy gains, the northeast region led the way for all brands. Our comp performance was driven largely by a 13% increase in the number of transactions with gains of 6%, 1% and 17% at Anthropologie, Free People, and Urban Outfitters respectively. The Company's average unit selling price increased 4% in total, down 3% in Anthropologie, and up 12% and 10% at Free People and Urban Outfitters respectively. Units per transaction decreased by 3% in total. Up 4% in Anthropologie, and down 3% and 7% at Free People and Urban Outfitters respectively.

At Anthropologie, the change in average unit selling price and units per transaction was primarily driven by an increase in accessories penetration. At Urban Outfitters, the metrics were largely driven by lower penetration of mark-down sales. Throughout the quarter, all merchandise divisions were comp-positive in all brands with accessories setting the pace for the second quarter in a row. There were meaningful trends across the board at all brands in the women's apparel business as well. We cannot discuss specifics, but I will say that we exited the second quarter with a healthy amount of intelligent with which to position the inventory for the second half of the year.

Now let me direct your attention to our direct-to-consumer business. Direct sales for the quarter increased by 42% to over $60 million with a circulation increase of just 8%. Versus the same period last year, the penetration of direct-to-consumer sales total Company sales increased from 12.2% to 13.3%, and website visits were up 35% to 15.7 million, a gain of more than four million visits. These outstanding results illustrate the success we've had with a myriad of e-commerce initiatives, including our new web platform, redesigned websites at all three brands, international shipping, product reviews, video, blogs, and a variety of innovative functionality and marketing techniques.

Finally, Free Peoples wholesale sales increased by 14%. The increase was driven by a 5% increase in units and an 8% increase in average unit price with department stores growing faster than special stores. Bookings for fall deliveries are nicely ahead of last year, and we remain optimistic regarding the potential of our new sub-brands, We the Free and Intimately Free People. Leifsdottir, Anthropologie's new wholesale line, shipped for the first time and generated revenue of just under $600,000 toward the very end of the quarter. The reaction at retailers far exceeded expectations, so we are encouraged by the brand's growth prospects.

I would like to now turn your attention to gross margin, operating expense, and income. Total Company gross margin advanced 373 basis points for the quarter to to 41.1%. This increase, which was driven by all three brands but especially by Urban Outfitters, reflects across-the-board improvements in initial margins, mark down rates, and store occupancy rates. Total Company comparable inventory was up 3% at quarter's end. We believe our inventories are clean and that we are appropriately positioned for the second half of the year. The Company reduced its operating expense by 95 basis points to 22.8%, principally due to the leverage of direct-store controllable expenses and other fixed corporate expenses, which more than offset results-based bonus compensation and our investments in our new start-up businesses, Terrain and Leifsdottir.

Income from operations increase by 75% to $83 million versus the same quarter last year, generating an 18.3% operating margin. Net income advanced by 79% to $57 million with earnings per diluted share growing from $0.19 to $0.33 versus the same quarter last year. Before I close, I'd like to provide a bit of qualitative commentary on each of our brands and our shared service group. First at Anthropologie. We couldn't be more pleased with the brand's stellar performance. The team executed superbly, resulting in a 7% comp on top of a 14% comp and a profit performance that ranked among the best in the brand's history and it's competitive peer group. Anthropologie spring shoot test was successful, resulting in an expansion to 42 doors this fall.

The brand is on track with its Canadian and European expansion plans, and we are encouraged by the buzz in the press. In June of this year, for example, the daily wrote, and I quote, "Visitors to America can't help but fall in love with Anthropologie, the place to head for those in the know. Frequent fliers would often pack an extra suitcase just to full up with everything. Anthropologie is famous for it's brilliant mix of the affordable and luxurious. The genius of Anthropologie is that there really is something for everyone among the quirky and unusual products." End of quote. I think this piece says it all. Finally, the brand's CRM initiative, Anthro, continues to gain traction with over 500,000 members in the database and a burgeoning program.

At Free People, we were equally pleased with the brand's superb performance. Another double-digit quarter of growth for the wholesale business, its 18th consecutive quarter of retail come store sales gains, 14 of which had been double-digit, by the way. The fastest-growing segment of our direct business and a profit performance that ranked amongst the best in the brand's history, all while almost doubling the store count from 11 to 21 and launching two new sub-brands, Intimately Free People and We the Free.

At Urban Outfitters, I'd like to begin by reading a quote from my first earnings call last year. And I quote, "I have personally spent a good amount of time visiting numerous Urban Outfitters stores digging deep into the business, reviewing the product, getting to know the staff, and working with Ted. First, let me say that we are all aligned--Ted, his team, and I. Second, let me say that I have rarely seen a brand franchise as powerful as Urban Outfitters. The connection Urban Outfitters enjoys with its customer is extraordinary. The energy in the store is palpable, and the brand's fashion leadership is unparallel in the industry. There's not another brand like it, and I wholeheartedly the business will dramatically improve as soon as the assortment improves. This, as I said, is our most important goal, and I am tremendously excited by the opportunity of working with Ted and his team on this objective." End of quote.

So our first step in the turn-around process to quote Jim Collins was filling the seats on the bus with the right people. Ted began by hiring Jim Bret, Liz Richardson, and Sun Choe into lead positions in the business, and Jim, Liz, and Sun proceeded to hire more than 40 new members to the design and buying team. We had an extremely large-scale and aggressive agenda that we developed to reverse the declining in women's apparel and accessory business. Firstly, increases the style count while holding the skew count flat, thereby providing a more appropriate balance of silhouette, color, novelty, fabric, brand, and price point. Two, to manage the business on a tighter calendar, resulting in an increase receipt flow, fastest turns, and fresher inventory.

Three, to manage the markdowns more effectively, resulting in better sell-through, a higher penetration of regular price sales, and higher inventory productivity. Four, to employ a complex attribute systems to optimize inventory based on trend. Five, to utilize design concepts to synchronize the design and buying process, resulting in a dynamic, yet cohesive, balanced, and compelling assortment. Six, to improve our brand execution, moving away from a tactic of private label towards a more strategic brand initiative featuring authentic, iconic brands. And seven, to initiate vendor collaboration to achieve fashion authority and offer the eclecticism for which we have become known.

Kudos to Ted and the team for achieving these ambitious initiatives, achieving a spectacular comp performance, and excellent profit performance, and most importantly, for building the foundation for the business to growth and prosper for years to come. Finally, Terrain has been operating for nearly four months now. For those of us who were around during Anthropologie's inception, it's a feeling of deja vu. To use an English expression, our customers are gobsmacked by the experience. They want to move into the site. They want their gardens to look what they see, and they are spending hours strolling the facility, mulling over a meal, and just all around enjoying the experience. Just like with Anthropologie's beginning, however, we have a lot of learning in front of us and adjustments to make, and it will some take some time before the brand model is refined.

I've said it's our Company's operational excellence that liberates the merchants to focus on their customers, the product, and the total brand experience. Once again, the shared service team delivered to the merchants and, of course, to our customers. Their accomplishments are too numerous to elaborate on, but suffice to say tat e continue to make great strides with talent acquisition and development, information technology, concept to market, all areas of logistics, real estate and development, and finance. Each of our teams are best in class, and it's an honor to work with them.

If it sounds like I'm bursting with pride, you are correct. When investors ask me about the biggest difference between being a brand president versus the CEO, I respond that it is the people. Leadership is certainly critical at all levels of our Company, but at the brand level, my biggest responsibility was the stewardship of the brand, and as part of creating the brand experience, I spent a good portion of my time on the assortment, inventory management, and the product itself. I am endeavoring to be a different kind of CEO, one that spends his time developing the leaders of our brands and the future leaders of our business, so I would say that my primary focus has shifted from the product to the people. In fact, as I progress through my second year as CEO, I am continually reminded that is our employees who enable our company to drive. All 11,000 plus employees are custodians of our brand. Our business is very much the result of a collaborative and shared vision.

The first time I entered Urban Outfitters offices some 16 years ago, I was struck by the diversity and breadth of talent and by and unprecedented level of passion, creativity, entrepreneurship, and extraordinary commitment to excellence. Dick had created an environment I couldn't wait to work in, and it's my number-one priority to continue to build on that culture. Our definition of the Company's core competency has also been constant--to create emotional connections with our customers through the creation of compelling, differentiated experiences. Our product offering is critical, but we believe the experiential aspect of our strategy is what truly differentiates us from other retailers.

We believe the Company has built three of the most recognized, distinct, and compelling brands in the industry, three brands that have consistently inspired a profound level of customer loyalty. Equally exciting, each brand has significant opportunity to grow through multi-channel expansion and brand expansion, and now we have Terrain to provide another means of growth. Our overarching goal has been constant and simple--to grow revenue by at least 20%, to grow profit at a faster rate than sales, and to reach a minimum of 20% operating margin.

We have achieved our growth goals consistently over time, and we remain confident in our prospects going forward. As always, the leadership team and I couldn't be more excited about the prospects ahead, and we look forward to continuing to inspire our customers and reward our shareholders and employees. I will now open the call to questions, and as is our custom, I ask each of you to limit yourself to one question. I apologize in advance. If you ask more than one question, we will respectfully respond only to your first query. Thank you.

Thank you. (OPERATOR INSTRUCTIONS). Our first question comes from Kimberly Greenberger of Citigroup.

Great. Thank you. Good morning and congratulations on a great quarter.

Thank you, Kimberly.

Glen, I was hoping you might be able to comment on early reads on fall deliveries, what is it that you are pleased with in terms of the Anthro leads, and what are you working here for fall?

I really, as I mentioned in my prepared comments, I don't feel comfortable going into specifics. What I will say is that there is traction in virtually every category that we are selling, and we began delivery fall and June. We had good reads on the business, and we feel comfortable with the way the inventory is position. On other comment I continually say is go to the stores, and if it's on the floor at regular price, it's probably selling. And if it's in the mark-down room, it's probably not selling.

Glen, can I ask a follow-up?

How about after the call?

I will. After the call. Thank you.

Okay.

Our next question comes from Jeff Black of Lehman Brothers.

Thanks. Congrats on a very impressive quarter, guys.

Thank you, Jeff.

On the operating expense line, can we get a sense of how much Terrain and Leifsdottir weighed on that and also how much new stores weighed on that? I know we opened a lot more this quarter. And what should we expect for SG&A growth for the back half just in terms of year-over-year growth? Thanks.

I'll ask John to respond to that.

Jeff, I can tell you there is a basket of things impacting the SG&A. One is the bonus accrual from a very strong quarter, and that's a much-higher bonus accrual than a year ago. Store openings were more aggressive in the quarter, so that is also contributing to the cost in the quarter.

Terrain was another element. The debit card process, actually, the interchange fee increased with the banks, so that was a part of the impact. And then, of course, when you have 13 comps rather than a 3 point or 3.5 where we start to leverage, that adds a significant amount of dollars. So I would say, if we run another 13, you might see a similar kind of SG&A growth, and I would be okay with that.

Great. Thanks.

Our next question comes from Adrienne Tennant of FBR.

Good morning. So you have every right to be bursting with pride. Great job to the team. My question is on the own brand penetration at the Urban division, I know it was a little bit lighter than where you wanted it to be last quarter. Where sit heading toward and where should we see it at the end of the year?

I'll ask Ted to give you specifics, but I would say that it wasn't lighter than where we wanted it to be. I think it's exactly where we wanted it to be, and the group has done a great job. Ted, do you want to give specifics?

The main area to focus on with regard to the question is obviously the women's business. Over 30% of the women's sales for the quarter was driven by in-house design run through our in-house production as well product. The team has come along very nicely, and the one thing that I would say, we talked about a lot of metrics in regards to this initiative, but the thing that feels great is the culture that we have in the business at this point between the buying staff, the design staff, and production.

After seven years of participating in the dynamics of those relationships, I can tell you it's never been better nor more productive, and as a result, we are really shooting to have that up to around 50% of the mix in the women's side coming out of the end of the year.

And historically did it peak at 50?

Well, in regard to in-house design product, it's been down in the teens. The private label product has certainly been higher than 50, but we are talking about in-house design versus buyer developed in the market private label.

Wonderful. Good luck and keep up the great work.

Thank you.

Thank you. Our next question comes from Margaret Whitfield of Sterne Capital Agee.

Good morning and congratulations. You mentioned the six objectives for Urban. I think you just talked about brand execution. I wondered where you are with the other objectives. Do you feel you have reached the levels you wished to, or is there more to come? What initiatives remain?

Ted, would you like to?

In regard to the Urban business overall, we still think that we have opportunity for improvement in margin performance. Some opportunity to be realized on our own in the IMU line but through wider initiatives going on in the Company in regard to supply chain. We definitely think that there's opportunity in IMU improvement.

The bigger opportunity in margin is improved markdown performance, so improved margin is definitely at the top of the list. In addition, we have some in-house initiatives around real estate and expansion of the business on the retail side. We are taking the business into another market in Europe this year, going into Germany before the end of the year. We are launching a concept in California before the end of the year where we essentially become a landlord as opposed to simply a tenant.

So there are a few different initiatives on the subject of real estate that we are deeply involved in at the moment as well. On the direct side, a lot of what is going on in direct has to do with improved creative work, which I think we've seen very nice pay back on through the first half of the year. That really was a key thing and our financing of our budget this year, and I think we have seen, as I said, very good pay back from the work we have done thus far in that regard.

Thank you.

Our next question comes from Barbara Wyckoff of Buckingham Research.

Hi, everyone. Great job. Glen, I guess, and Dick. What keeps you up at night? Everything is so great. What keeps you up at night?

Barbara, I live in a constant state of terror to be honest, and I really think that you can't be good at this business unless you have just an other worldly sensitivity to every queue, every day, in every part of the business, not just the product but everything. And so I'm probably a little schizophrenic because I'm incredibly confident. We have 11,000 plus employees that I think are the best people in the world. So what I try to impart in the prepared comments is that it's not me. It's the 11,000 people, and, my God, these people are unbelievable.

So I am incredibly confident in that. But the only thing is that confidences change, and we just always have to keep our ears to the ground and incredibly sensitive to what is happening. The biggest single issue that we face is people, and we talk about it a lot. In fact, we are probably talking about it more than we ever had. We have phenomenal people, but we need lots of people, and we'll try to be as innovative with the support of Bill Cody and the rest of the group around that as we are in other parts of our business. Dick, do you want to?

Nothing to add. I think it's people, and I think you said it correctly.

Great. Thanks. Keep it up.

Thank you.

Our next question comes from Michelle Tan of Goldman Sachs.

Great. Thanks and I'll add my congratulations on an amazing quarter. Looking at the Anthropologie business, I guess the question I would have is how you are continuing to drive the gains in transactions in those stores. Do you have any color on it whether it's from the CRM initiatives or who you are talking to at the store level? Is it the same customer buying more frequently? Are you bringing new customers into the store? What is attracting them to the brand?

Michelle, that is a great question, and we are still only about maybe 40% into the way of our functionality the CRM system, so I really can't answer those questions. I hope to be able to answer those questions in 12 to 18 months from now. My gut instinct is that we have a higher level of conversion. I think the stores, all three of our brands, look really good, and I think that they are places to be. It's almost when you look back at 9/11, our business almost popped up immediately. Why? Because it's a mini vacation when you walk into any of our three brands, and I think it's the same way today.

With all of the horrendous news that is going on and the discounting, they come in and they have a mini vacation in our stores. Again, it's not just Anthropologie, I think all three brands execute it beautifully. They kept the content fresh. They nailed the fashion the customer wanted. The marketing efforts were great. The visual merchandising was great. They were just positive places to be.

Great. Thanks and congratulations again.

Thank you.

Our next question comes from Richard Jaffe of Stifel Nicolaus.

First of all, congratulations, Glen. You are right to be proud. It's really sensational given the climate of the environment. Given the success and the greater-than-expected results across all channels, is there an opportunity to rethink the growth prospects in the ultimate size of each division, Anthro, Urban, Free People retail, Free People wholesale, and to change our perspectives on how big each of these businesses could be and the rate in which they can get there?

Richard, great question and the answer is probably no. I think that we believe to the core of our being that scarcity creates demand, and as Dick has said many times, as big the enemy is cool, and we absolutely--in fact I would be more conservative about the store count. Early on, I used to think Anthropologie could be 300, 350, and we said publicly that we are comfortable in North America, Anthropologie and Urban both in the 250 range, Free People in the 100 range. The reality is that we are less than 50% penetrated in North America with our three core brands. We are minimally penetrated in Europe.

We have virtually no distribution in the far east. We have tremendous potential in the direct business. I think that Meg has paved the way with We the Free an Intimately Free at the Free People brand, the whole idea of doing sub-brands that feel like the parent brand but serve a different purpose. I think Anthropologie was thrilled with the initial results of Leifsdottir. Whether or not that stays under the Anthropologie brand or becomes its own brand eventually, I think we won't have a decision on that for the next 18 to 24 months.

But to get back to your question, we see ourselves as a portfolio of lifestyle brands that all have an experiential component to them, and all of our brands will continue to be targeted to an up-market, sophisticated customer, and typically the customer that we target to appreciates scarcity. So we'll continue on that path.

Thanks very much.

Thank you.

Our next question comes from Samantha Panella of Raymond James.

I'll add my congratulations as well. I was wondering if you can give us an update with where you are establishing an office in Hong Kong?

Sam, I think most of you know that I was there a couple of months ago with Barbara Rosehocks, and we are making tremendous strides with our CTM effort, a part of which may or may not be establishing an office there. We are still working out the strategy. I am not prepared to talk about it yet, but I'll tell you I'm thrilled with the progress Barbara has made.

It's very important to understand when you look at our gross margin, the improvement was equally weighted between mark-down reductions, initial margin, and occupancy. In fact, initial margin contributed a little bit more to the improvement than the other two categories. So that is a fantastic testament to the success Barbara and the merchant teams have had over the past several months.

Great. Thank you so much.

Our next question comes from Liz Dunn of Thomas Weisel Partners.

Hi. Let me add my congratulations. I was wondering if you could just discuss your inventory positioning by concept and give us a little bit more color on the quality of that inventory, just sort of how current is it. Obviously very current. I'm not seeing a whole lot of markdowns in the store, but if you can provide additional detail on the inventory.

Liz, the important thing to remember, we talked about this several times before, and I didn't bother mentioning it again, is that we really don't look at last year when we look at our inventory. We look at our weeks of supply, and we plan the inventory dynamically. In my almost 15 years here, I've never been asked to hold the mark down. I've been told to take them the minute we know we have a mark down.

That's never changed, and it's unlikely it will ever change. So we feel very, very comfortable with our position of 3% comp inventory in total. By brand it's actually down 1% at Urban. It's up 6% in Anthro, but in weeks of supply by brand, we are exactly where we are want to be. We had square-footage growth in the quarter of 17%. Our total inventory is only up 14%, so on a square-footage basis, we are actually down, and in terms of the FIFO, I don't remember the exact numbers. John can go over that with you after, but I can tell you we are very clean.

Great. Thanks.

Our next question comes from Brian Tunick of JPMorgan.

Good morning. And this is Anna for Brian. I was hoping to clarify on SG&A. Given the higher bonus accruals this year, does this raise your leverage points on SG&A as we go through the year, or do you still need 3% roughly to lever? Thanks.

We would still be targeting at 3.5 to 4% SG&A leverage point. We obviously have some issues going on with some extraneous factors, and that's why I said it's appropriate to target at 25% kind of SG&A growth if in fact comps continue at a 13% level. That is not guidance by any stretch, but that would be the thought process. We don't have any problem with the leverage points in the business. We think people flex very well in those areas that they can flex in. So we are not disappointed with the total SG&A growth.

Great. Thanks so much guys. Good luck.

Thank you.

Our next question comes from Betty Chen of Wedbush Morgan Securities.

Thank you. I was wondering if you can talk a little bit more about the accessory business. I think you mentioned earlier that is now had two consecutive quarters where it's led the way in terms of category performance. Could you talk a little about what has changed in the category, any additional color you can give whether it's shoes, handbags, and also what is the current mix of accessory sale by division and what is your longer-term target? Thank you.

Okay. That's a lot to remember. You may have to help me. But I would say the principal reason why our accessory business is better is that we focused on this year. We allocated more staff to it, and we are just executing much, much better. There are certain, and I'm not going to go into details of what is driving the business, there are certain consistencies across all three brands. On the other hand, there are certain businesses in one brand that may not be happening in another.

So there are some similarities and some differences. What is common is that we focused on it across the business. And I don't have the exact penetration numbers, so maybe John can give you a call after the call, but the highest penetration is actually at Urban Outfitters. They historically have done the best job with accessories followed by Free People and Anthropologie. If you recall, Anthropologie had hiccup in the accessory business a couple of years ago. So there is quite a bit of opportunity there for increased penetration.

Great. Thank you. And best of luck in the third quarter.

Thanks so much.

Our next question comes from Janet Kloppenburg of JJK Research.

Good morning. Congratulations to everyone. Ted and Glen, I was wondering how important your focus was on price right now. We are hearing a lot about price increases on product source from around the world, and I'm hearing some more from you about less private label, more vendor collaboration. I am wondering if we are going to be seeing average pricing rise and if you think that's an inhibitor of the business or whether you think it won't have that much of an effect Thanks very much.

I'll answer one part of the question, and then I'll defer to Ted to answer the second part. With regards to the price we are paying at the factory level, what I've said on the last call and what I've said in several conversations that I've had, is we are not seeing pressure. And having been there myself and speaking to a lot of people, my understanding is that most of the price pressure relates more at the commodity level. The more detail hand work, wash work, stitch work, et cetera, the product has, the less pressure there is. So I've said a few moments ago that the largest part of our gross margin increase in the second quarter was actually IMU, but the group is doing a terrific job.

By the way we never achieve IMU for charging more for a product this year than we did last year. We achieve it by either paying less for a product than we paid a year ago or by building a lot more into the product so we can charge more for it. So it's really--I'm hearing the same things I think the rest of you are hearing, but we are not seeing it in our own business. With regard to the pricing strategy within the brand at Urban, I'll defer to Ted.

The only thing I would touch on, Janet, in addition to what Glen is that we did see nice grow in AUR on our regular price women's business. Obviously, our AUR growth improved in a nice fashion type to less mark down from the business, but on the regular price piece of the business as well, we saw a nice growth in AUR, and that is indicative of improved content. We are seeing nice comp performance. The customer is responding to the improved content. So at this point we have not seen any issue there.

Thanks very much.

We are very -we are always focused on having an assorted price strategy in all of our businesses. We can't take out eye off of opening price point, and we never have, but we also have no resistance to special product and peer pricing, and we are not seeing anything in our business now that would suggest it's any different than it was a year ago.

Thanks very much and good luck.

Thank you.

Our next question comes from Christine Chen of Needham & Company.

Thank you. Congrats on another amazing quarter.

Thank you.

I wonder if you can talk a little bit more long term about international opportunities now that you are selling internationally at Anthro and then about opportunities in the far east for Urban. Thank you.

Yeah. I think we spoke about this on the last call when we had a special board session devoted to growth several months back, the board decided that we would focus on Europe over and above North America. Since that time, I've been over there twice. I think Ted has been three times now. We've gotten more aggressive about finding sites for Anthropologie. We are accelerating the rate for which we opened Urban in Europe and we are very, very confident in our prospects there.

So we are still in the stage of due diligence, Christine, so we are learning a lot about the kind of infrastructure we need there, how we can tap the potential that is there relative to the potential that is in North America. The interesting thing is that the apparel business in Europe is about the same size as it is in North America, but the distribution channels are different. So we are figuring out how we can tap into that potential.

At this point, I'll tell you we are very, very excited. We think it can be at the very minimum neutral to the ROS rate and possibly accretive, and in just general terms, we think that it can probably be a minimum of 20% of the size of North American business but probably significantly more than that.

Did the European stores at Urban do better than the US stores?

The European stores have had a pretty strong run for the last few years for the quarter we are just completing. All stores were comp positive. The comps overall were in the, I think, mid-teens for the quarter up against a pretty good quarter last year as well.

Great.

I just want to remind everyone, Ted launched Urban Direct, a standalone Urban Direct business in the UK, Ted, about a year ago?

Fall of '06. Fourth quarter '06.

And it's doing quite well, and Anthropologie began shipping internationally with a strong focus in several European markets at the tail end of last year and is doing very, very well.

Great. Thank you and good luck.

Thank you.

Our next question comes from Sharon Zackfia of William Blair & Company.

Good morning. Glen, I'm curious where you are at this point in identifying a successor to head Anthropologie. As you look across the rest of the businesses, how is the succession planning, and are there major gaps that need to be filled?

I think that we are pretty close with the solution to Anthropologie North America. I would expect that we'll have something to talk about within the next month or so. With regards to the succession planning, as I've said, I see that in the idea of leadership development is my number-one job, my number-one priority, and I probably spent probably 30%, 40% as much as 50% of my time each week working on that, and I will get that done.

Thank you.

Our next question comes from Lynn Pierce of Roth Capital Market.

Thanks and congratulations as well. Glen, I wanted to--

You changed your name.

I did. I'm trying to disguise it. In terms of performance by either geographic performance or location, you called that out before--I just wondered if you can update like lifestyle street and the mall.

Yeah. I think if you take out some of the outliers, the headline is there's really not much of a difference. So I said that the northeast led the way, but all regions were good. By type, Urban had slightly more strength. John, where?

The malls were actually the best performing. Metro was second best, and there really wasn't a huge spread.

And Anthropologie was relatively flat. So there is really no pattern either geographically or by type that I would want you to read into.

Okay. Great. Thank you.

Thank you.

Our next question comes from Robin Murchison of SunTrust.

Thanks very much. John, this is for you. The long-term marketable securities 191, I presume that is mostly auction rate. Can you give us an update on what is going on there?

Auction rate position is really pretty good. We have a small amount of student loans that the auctions have failed on, but we have comfortable because parity on those instruments is fine. We have some additional municipal auction rates, which are commanding great interest rates, and we bought into a few of those to take advantage of those. So in total marketable securities, we are probably dealing with about $90 million of auction rates, and the balance is all in other types of instruments.

Thanks very much.

Sure.

Our next question comes from Marni Shapiro of The Retail Tracker.

Congratulations. I was curious if you can give us any update on the home space. It was something you were tinkering with. At Anthro, you obviously have big hits there in bedding, and it looks that at Urban you have dived in a little deeper to what I call dorm kitchen and a couple of other subcategories. I was curious if we can get any color on this.

I think that the home business across the brands was healthy. Again, I'm sure it frustrates everyone, but we don't want to give specifics within categories. But the home business was maybe slightly below the rest of the brand in both brands, but it was a very healthy business. We are very comfortable with where we are. I say the same thing. Go into the stores. If it's a regular price, it's selling.

Great. Good luck with back to school.

Thank you.

Our next question comes from Dana Telsey of Telsey Advisory Group.

Good morning, everyone, and congratulations. Glen, if you talk about people and people being a huge priority, what holes do you have to fill, and how is the training? Does it differ by brand in order to get people on basically imbued with the culture of either or any of the brands? And just lastly, as you think about differentiation, which is what I think all of your brands are about, how do you think store differentiation versus product differentiation and the process to get each there? Thank you.

I will ask Bill to comment on the first two parts of your question, the key openings and the training.

I think from the key openings, outside of Anthropologie presence, we are continuing to look for a Chief Operating Officer, and that is a key position for the Company to really give us the opportunities that Glen spoke is not only on the people but on the operations side of the business.

So if I look across the business that is where we are going to focus. From the training side, each of our brand is training within the brand, and that really is the thing that keeps the culture distinct from Anthropologie from Urban and Free People, so from a corporate level, we focus on leadership and let the brands take care of the cultural elements and things that are specific within each of their businesses.

And, Dana, what was the last part of the question?

Differentiation is how I see your brands is what they are all about. How do you look at the store environment differentiation versus the product differentiation? Is there a processes that you use to keep them going at the same time or are there different stages?

We can discuss some of this offline, but the way our business is structured, we have creative directors or visual directors who are responsible for the store environment. We have folks who are responsible for the marketing communication via the website, the catalog, the labels on the garment, and so on, and then we have people who are responsible for the product.

So we have a variety of creative people, and they work collaborative together ,but they also bring their own point of view to it. But I'll give you a call after, Dana, and spend some more time with you.

Thank you.

Okay.

Our next question comes from Crystal Kallik of D.A. Davidson.

Good morning, everyone. I was curious to see if you were still thinking that second half circulation would be about flat-ish, and I think because of the calendar shift you expecting one quarter to be quite a bit and then one down quite a bit but net flat-ish, and how does that react to your feelings about the direct business and the sales growth there for the second half?

I'll leave John to give the specifics on circulation, and then I'll talk about direct.

The third-quarter projection is to be up 18% on catalog circulation, and that is simply a timing issue because fourth quarter is down 19%. So it's an end-of-quarter catalog that shifted from one quarter to the other.

And in general, we are very, very bullish on our district business. When you think about a 42% increase in sales--42%--with just an 8% increase in circulation, that is staggering, and it is an illustration of, as I've said, the myriad of initiatives the direct groups have undertaken over the last couple of years, but it also illustrates what we've said in prior earnings calls--that paradigm shift in the way people shop. I think it's different from quarter to quarter.

I think people tend to use the Web more in the fourth quarter than quarters one through three, but the modern way to think about the business is to view it as one brand across multiple channels, and sometimes people go to the Web and end up buying in the stores. Sometimes people go to the store and end up buying on the Web.

But the world is changing, and the whole nature of the business is changing. As John has said in prior calls, ultimately, we believe the direct business can be significantly more profitable than the bricks and mortar, so we are very happy about the increase in penetration. But we don't expect the circulation to predict the sales increase in the direct business. We certainly think they are related but not linear.

Thank you very much.

Our next question is a follow-up from Adrienne Tennant from FBR.

I wanted to get the D&A and CapEx for the quarter, please?

The D&A and CapEx. I'll let John handle that.

Thanks.

Total D&A was $20.5 million.

And the CapEx?

CapEx, I don't have that handy.

Okay. I'll follow up with you. Thanks. Good luck.

Thank you.

(OPERATOR INSTRUCTIONS ). Our next question is a follow-up from Kimberly Greenberger of Citigroup.

Glen, I'm wondering if you can talk about the CRM package at Anthropologie. How are you thinking about developing this over time? And when do you think we might see the top line impact of those efforts? Thanks.

Kimberly, the whole premise of the program for the customer is the more we know about you, the more we can do for you. And so it's not a program where we are going to be using accumulative spending to provide discounts. It really is going to be a database system that helps us understand how people want to shop the store, when they want to buy things, the kind of services they want, and it will, I think, build the brand and reinforce the brand as opposed to promote the brand.

We are, as I've said earlier, we are about maybe a third to 40% of our way there technologically, so we don't have the systems to do everything that we want to do now to segment the files and communicate as consistently as we want, but I am very pleased at the rate with which we are acquiring names, and anecdotally, I am pleased with the impact that the communication on this 550,000 customers is having. For example, we have always circulated catalogs in our retail trading areas, but we've used a modeling technique to get to those names. We really didn't know if they were customers or not.

We inferred they were customers. Now those 550,000 people who have signed up to be Anthro customers are getting the catalog. Not necessarily all the time but a good portion of the time. So it's a work in progress, but the long-term view is all about understanding how to better satisfy the customer. Much in the way we do with the direct business.

Thanks.

Thank you.

Our next question comes from Margaret Whitfield of Sterne Capital Agee.

Thank you. Just a follow-up question. You indicated your back to school is off to a good start. I was wondering if you can comment on how your comps are running month to date.

Margaret, we don't do that. We'll give some indication of our business in our mid-quarter release, but what I would say is back to school for us started really about two-thirds, 50%, two-thirds of the way into the second quarter. I did say that we built some momentum particularly at Urban with back to school, and that's all I can say at the current time.

Thank you.

Thank you.

I'm not showing any further questions. Would you like to continue with any further remarks?

No. Just thank you all for your questions and your support.